US Dollar gains broadly with US inflation data in focus
- US Dollar gains on Monday with the DXY above 105.50.
- The fundamental Greenback uptrend remains intact as the US economy continues to outperform other advanced economies.
- Key data releases this week include the US October CPI on Wednesday and Retail sales on Friday.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, is broadly gaining in Monday's session. The focus for traders is now on the US inflation data for October, which will be released later this week. A strong inflation reading could further boost the US Dollar as it would increase expectations that the Federal Reserve (Fed) might slow the pace of interest rate easing.
The DXY initially rose last Friday after positive UoM consumer confidence data and the Federal Open Market Committee’s (FOMC) announcement of a 25 bps rate cut. Despite concerns over easing labor market conditions, the Fed expressed optimism about economic growth.
Daily digest market movers: US Dollar continues rising toward multi-month highs
- The fundamental US Dollar uptrend remains intact despite Trump's victory stalling the currency.
- The US economy is outperforming other advanced economies and is in a "sweet spot."
- The prospect of looser fiscal policy under Trump and limited Fed easing room point to a stronger Greenback.
- The US October CPI on Wednesday and Retail Sales on Friday, are this week's data highlights.
- There are also plenty of Fed speakers throughout the week including Chair Powell on Thursday.
- Growth remains solid in Q4 with the Atlanta Fed GDPNow model's estimate for Q4 GDP standing at 2.5% SAAR.
- The New York Fed’s Nowcast model is tracking Q4 growth at 2.1% SAAR.
DXY technical outlook: Bulls gather momentum but approach overbought conditions
The DXY index advanced above the key resistance at 105.50 on Monday, reaching levels last seen in July. This bullish move has been supported by technical indicators that remain in positive territory.
However, the indicators are approaching overbought levels, suggesting that the index may be due for a correction in the near term. Traders should monitor the index closely to see if it can maintain its momentum or if it will pull back in the coming days.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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